My AIM Investment Picks Part 2.

Having now briefly discussed my revised portfolio and some front end picks I would now like to expand a little on some of the other shares in my portfolio.

#HZM along with #BMN, #AVCT, #SRB and #YU are my longer-term growth-related stocks even though HZM still needs to achieve final finance. My view is that the combination of the current nickel pricing environment and EV related sentiment coupled with the lack of available tier 1 assets, makes finance more of a formality than perhaps is usual.

My biggest concern for HZM is their ability to hold onto the business as they go toe to toe with the big players for the finance of Araguaia. However, from an investment point of view, I haven't allowed this to deter me because the drop to the 6p mark in my view presented adequate hedging against this eventuality which I gladly accepted.

I also took into account the Summer lull in interest and the fact that this simply didn't add up given the fact that the company is cashed up to get through this finance. Plus its 2 assets at this stage of the EV evolution cycle are just too exciting for a drop 20% below their last raise to hold. With the bet then being that they could secure finance at higher levels and deliver a solid SP range as construction begins and takeover interest perhaps takes a hold.

I said back in Feb that the 7.5p finance raise could well set the precedent for the final equity raise (see here). Whilst that was helped along by nickel prices being +$19,000 at the time the continuation of that trend (with the March/April dip noted) has further supported my view that a return to those sorts of levels can be achieved.

Today, we find ourselves within range of that figure be it I continue to include a discount on the final equity raise. A push north of 8p perhaps helped along with some news flow prior to the anticipated final equity raise would make me feel even more secure that this play /pretty much) has played out.

However, with nickel continuing to hold above $19,000 and the SP recovery we have seen to date, I certainly don't feel we shouldn't be all that far away.

My conservative view is that HZM will raise a maximum of $150m of further equity based on a total $500m finance package (full CAPEX reported at $461m). This allows for working capital requirements and taking Vermehlo to construction-ready status. I do think more royalty finance is a possibility along with equity at the project level but I can't factor that in without more evidence. So I instead decide to play it safe.

For me, funding for Vermehlo works has to be factored into a debt package whose backers will surely want to see Araguaia funded outright at this final funding point. I also think any cornerstone investor would be pushing to have it included, which could work in favour of HZM as they push for the best deal possible.

Nothing I have learnt from HZM management makes me doubt that the full $325m debt will be achieved. This leaves $175m of further equity (65/35 debt to equity ratio in line with March 2021 update) of which $25m was already secured in February. If so then $150m in new equity (which is a big chunk) would still be required.

I am being conservative here remember.

At 7p which I am beginning to feel is my bottom end position we are talking c. 1.5BN new shares for a total of 3.2BN. That for me would be a great result because it would value all of HZM at less than one-third of Araguaia $1BN NPV. A valuation that is delivered at long term nickel prices some 20% below those we are witnessing today.

What that also would do is give me as a shareholder a solid run at Vermehlo which absolutely dwarfs Araguaia and is 100% EV revolution focused.

All of which gives me great comfort of reaching a solid double-digit valuation as both projects move forward. Additionally and most importantly it gives me security that any takeover would then come at a good premium to that 7p raise point.

I feel secure in the belief that no takeover attempt happens until project finance is completed. The so-called big players still want to see as much risk as possible taken off the table. So if it were to come I would be focusing on the 12 months immediately after finance conclusion but it will in my view depend on who the cornerstone investor turns out to be.

As I said alluded to on my Twitter feed on Tuesday I think if I was going to attempt a takeover of HZM then I would want to be the cornerstone investor and the holder of perhaps c. 30% at the equity raise price. It makes the other 70% bought at premiums all the more sensible and financially bearable. Ganfeng's takeover of BCN is a testament to the effectiveness of that policy.

To be clear I am not saying HZM gets taken over. Nor am I saying they absolutely will achieve 7p on their raise. I am saying that we are in and around that figure already which is just fine (even if 0.5p lower) with plenty of reasoning to believe it will be achieved.

The play is complicated. As an investor, my job is to run the scenarios conservatively and establish which ones will hurt me and how likely they are to come true. The raise may come in a little lower but I think (assuming finance really does close in Q3) we are already at the stage where it will no longer hurt the next leg up in returns and that is what matters. The same goes for any potential takeover.

Under a recovering SP, there shouldn't be a lot now to fear so long as the finance gets closed out and HZM management fights their corner properly. Something I trust they are capable of doing.

On my other growth labelled stocks, I have talked #BMN and #AVCT to death of late and so won't go there again too much for the moment. Needless to say that both have immense potential in them be it that BMN right now needs some continued support from vanadium prices as they bring Vanchem phase 1 online and start to eat into their temporarily elevated production cost. Once there then-current valuation levels will likely never exist again.

In terms of AVCT I really believe that the hardest part has been overcome when they expanded and accredited their diagnostics division. Of course, success on the therapeutics side is key but I still think many underestimate what their diagnostics division can achieve without it. So if nothing else the therapeutic angle is something of a free shot be it one with atom bombesc qualities.

#SRB remains my staple AIM gold play because despite a lengthy period of uncertainty and setbacks I believe they are finally on the path to realising the potential in their acreage. This is supported by a very solid $17m cash pile which should continue to expand with gold at c. $1,800 per oz and their production returning to normality. For a debt-free enterprise valued at c. $67m that cash position and avenues for its use really deserve more respect.

We are assured that debt finance will now complete the CAPEX for Coringa which should help take production from this year's 36k to c. 80k by 2023. All of which helps secure their significant exploration programme work and enable it to continue through 2022 and beyond. It is that resource expansion that should ultimately define my investment in SRB and likely lead to them being taken out/partnerd by a bigger regional player.

The existence of which SRB was keen to point out in their June presentation. Everything happens for a reason particularly when it comes to public listed company's words and information flow. So I take that along with CEO Mike Hodgesons recent comments highlighting the same as significant and a sign of discussions yet to be revealed.

I hold a small AIM gold player because I believe it to be a hedge against any wider market turmoil. I am certain that a big fail of some sort will arrive at some point in my remaining investing career. So holding gold/silver, be they stocks or ETFs is for me a hedge or even better a potential future massive windfall however long they may have to go sideways whilst I wait.

Last but not least on this list is #YU. Not the darling of AIM it once was and certainly not one that seems to get too many AIM investors excited. It does though have me enthused about its prospects. So much so that it is a major component in my portfolio.

Given underlying concerns about the future of the general market's prospects, holding an exciting and rapidly expanding utility play for me adds a great angle to a portfolio designed to be protected against future turbulence.

This is a debt-free company with a solid cash pile (c. £11m at end of July = 27.5% of today's valuation) that is now moving into profitability. That move establishes said cash pile as actual cash on hand. A position that I do not believe is currently allowed for in the valuation.

They are acquisition hungry and should soon (Sept interims) demonstrate a path to 30-40% growth in revenues even without that hunger being satisfied. At some point, the market will start to believe them when they say they are in a rapid expansion phase with plans to be a £500m revenue company within 5 years.

They have new Leicester offices already paid for with a new digital (lower staff cost) offering that serves YU up with a direct access point to their business customer base. It only went live in H2 2020 and still managed to deliver £21m that year. Now that's it's more bedded in I expect it to deliver a significant uplift in new contracts in 2021 and beyond.

YU's 2020 main acquisition was Bristol Energy which delivered 4,000 new meters (so over 20% of their YE 2020 total). More importantly, it delivered them the Bristol Cit Council contract and enabled them to access the all-important DPS platform and,

"allowing access to further business opportunities with high credit quality public sector entities."

The above excerpt from their FY 2020 report highlights the new public sector focus but also the "pool of c. 20 small suppliers" of which (where appropriate) YU deem c. 8-12 as suitable for their acquisition drive.

Each of these small players offers between 3,000 - 5,000 new meters. That's c. 20-25% more meters than they had at the end of 2020.

Assuming the progress seen in H1 2021 (+£65m in revenues leading to "positive adjusted EBITDA expected for H1 2021") continues for the rest of the year, then I expect staged re-rates to take place as the market begins to accept YU as a profitable organisation with significant cash on hand and as big chance as it ever had to attack it's £35BN UK market.

To place that in perspective at 40% growth in 2021 revenues YU would still only be running at £140m total. That's just 0.4% of their addressable market.

In 2020 YU tendered for $2.5BN of new work but were limited by their desire for safer higher-margin contracts. The combination of entering profitability + substantially increased revenues allows them to increase their hedging position with SmartestEnergy and in turn reduce their overheads and therefore attack more of those tenders more aggressively.

The work is there but the means to win it at profit wasn't before. It is now.

On the downside, liquidity is very poor which isn't helped by CEO Bobby Kalar and other directors/major shareholders keeping c. 56% of total shares out of public hands. At just 16m total shares in issue, this can lead to difficulties/volatility in dealing shares which puts some investors off.

However, I am a firm believer that such issues always right themselves when a company is moving in the right direction and right now YU Energy most definitely is. Under such circumstances, small numbers of shares in issue plus tightly held positions can also work in an investor's favour and that certainly forms part of my play here because there's nothing I like more than rapidly expanding AIM companeis with limited shares in issue. It leads to solid performance delivering far stronger rewards.

On its current trajectory, at some point, YU is going to wake the investment community up to its potential. I will be waiting and watching until it does.

Note - This article represents the opinion and research of the author only and the author currently holds a position in one or more of the stocks mentioned. Nothing shared in this article is to be deemed financial advice. Where possible all facts have been checked and references provided, however, it is the responsibility of the reader to check all details for themselves before making any financial decisions. Please also refer to the disclaimer policy


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